THE HEDGEYE EDGE
We think Boyd Gaming’s (BYD) recently reported 2Q18 fundamentals and outlook could present an immediate term fundamental peak.
Even with sky high consumer confidence and accelerating GDP, SS regional revenues aren’t seeing much of a lift. A major part of our BYD bull thesis a few years ago was that the company should close the margin gap with its peers, and that has happened. Unfortunately, the easy stuff is done and the further cost cutting opportunities may be few.
The Past for Regional Gaming Stocks: Regional gaming stocks have been on a very solid run since late 2016, though most of the run has been driven by factors outside of revenue growth. They include:
- Tax reform
- Industry consolidation (M&A)
- Cost cutting – margin opportunities
- More rational promo spending
The Future for Regional Gaming Stocks: With many of these exogenous factors now in the rearview, the focus could once again shift to the dreary regional top line set-up. A set-up that looks more like the following:
- Weaker population growth trends to eventually eat away at casino operators’ ability to slash marketing and promo allowances.
- Core demographic of retirees and 45 year-old plus population is growing much faster in regions outside the regional markets, while the boomer population (cohort with highest propensity to play slots) is set to shrink meaningfully over the next few years.
- Hold % breaching new highs every year, but might be testing unsustainable levels. This trend has continued and has lessened the blow from demographics, but we might be closer to the end than the beginning.
- Total new casino supply and new slot machine supply growth (Racino and VGTs) continues to grow close to 2-3x that of organic population growth, which partly explains why casinos are having a difficult time growing the top line on a same-store basis – the industry is oversupplied.
- Patronage to casinos continues to fall as commercial and Native American competition mounted, alongside a tough demographic tide.
- The “pond” of gamblers hasn’t really grown, while the total number of establishments has soared since the early 1990’s.
- Home prices correlation with gaming revenues breaking down as demographics take over. In addition, home price growth twice as slow in the regional markets vs. other areas in the US and gaming hot bed (NV), where RRR dominates.
Looking specifically at the forward-looking headwinds BYD is facing…
After acquiring the 4 PNK assets, Valley Forge, and Lattner Entertainment, we estimate BYD’s pro-forma Midwest/South EBITDAR contribution would expand to 65%, assuming the PNK assets close at the end of 2018. By adding regional presence, BYD is less exposed to the high growth LV Locals market and more susceptible to the long-term demographic headwinds that have kept regional growth in check.
Our analysis suggests BYD could be ceding Las Vegas Locals share to its main competitor Red Rock (RRR), which is particularly worrisome since BYD should have a competitive advantage given all the construction disruptions at RRR’s Palace Station and the Palms. With and without the new acquisitions (Aliante, Cannery and Eastside Cannery), we estimate BYD lost Locals market share on an apples-to-apples basis in 2017 and so far in 2018.
Wage pressure does not seem to be reflected in Street 2018/2019 estimates. The Hedgeye Macro team is projecting higher wage inflation to manifest as early as late 2018.
We fear that the story going forward is going to revert to bad demographics, stiff competition, and wage pressure, all combining to limit EBITDA growth and possibly deflate the multiple.
We see fair value closer to $29 per share.
ONE-YEAR TRAILING CHART
